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Non-Compete Agreements Under Georgia Law

Non-Compete Agreements Under Georgia Law

Jul 20, 2011

Gary Whitaker of Whitaker Business Law

In May of 2011, HB 30 was signed into law. This law implements recent changes to the Georgia Constitution ratified by the Georgia voters on November 2, 2010.  For many years Georgia had been viewed as being one of the US states with the most legal hurdles to enforcing non-compete agreements, especially non-compete agreements against prior employees. A failure to specify reasonable geographic or duration restrictions, or the scope of prohibited activities, among other deficiencies, would completely void a non-compete, and courts were not permitted to modify the restraints to make them reasonable. As a result, relatively minor issues could completely void a non-compete, allowing, for example, a former officer of a company to start up a competing business across the street.  While Georgia and federal law prohibited (and still prohibits) a former employee from using confidential information, such as confidential customer lists, in his or her new position, in the absence of evidence that the identity of the customers was confidential information, or that such customers were solicited by the former employee, a company could not get legal assurances that a former key employee could be prohibited from opening a competing business immediately upon termination of employment.

The Georgia constitutional amendment, and the implementing legislation, attempted to bring Georgia back into the legal mainstream in this area, but it still retained many protections for employees.  Critical distinctions are made as to (1) the type of employee who may be made subject to post employment restrictions and (2) the nature of those restrictions, whether pertaining to confidential information, solicitation of employees or creating a competing business.

The major features of this new law are the provisions concerning post employment solicitation of employees and competing with the prior employer.  In either case, the employer seeking to enforce the restriction must prove a legitimate business reason justifying it.

An employee may be prohibited for two year s following termination of employment (the law does not distinguish between terminations for differing reasons), from soliciting the employer’s customers or actively sought prospective customers, with whom the employee had material contact during the term of his or her employment, without regard to any geographic limitation, for purposes of selling competitive products or services.

An employee may also be prohibited following termination of employment, from competing with the employer’s business (irrespective of solicitation of customers), subject to the following restrictions: (1) only a “key employee” or a “professional” may be so restricted, (2) the restriction must be limited in duration to two years (unless the employer can overcome a presumption that a longer period is reasonable under the circumstances), (3) the restriction must be limited geographically or specifies the competitors for whom the employee may not work, and (4) the scope of prohibited activities is measured by the business of the former employer (for example, “of the type conducted, authorized, offered or provided within two years prior to termination of employment”).

The law has a detailed definition of what constitutes a “key employee” but generally it is defined as an employee who by reason of the employer’s time, training, trust, or exposure to the public or to customers, vendors or other business relationships has gained a high level of reputation as the employer’s representative or has gained a high level of influence or credibility with the employer’s customers, vendors or other business relationships, or who has developed specialized skills, abilities, customer information or contacts by reason of having worked for the employer. For example, an officer of the company, or a sales person, could be considered key employees; while a technician, janitor, manual laborer, mechanic or clerical worker normally would not and could not be prohibited from working for a competitor after termination of employment.

In some situations a geographic limitation would not be possible, such as where an employee is a sales representative dealing over the phone with customers throughout the world. In such a case a company could attach as an exhibit to the non-compete contract a list of particular employers that are prohibited competitors (in other words, the employee could not be prohibited from working for any competitor anywhere in the world, but could be prohibited from working for a specified competitor, even if  that competitor were located on the other side of the world).

A provision in an employment contract that prohibits a current employee from competing with his or her employer during the course of the employment need not be limited as to scope of activity, duration or geographic area, as long as on balance it is a reasonable protection of the employer’s interests or protects against conflicts of interest.

The statute also specifically permits a court to modify a restriction to make it reasonable (but not more restrictive); the contract should have such a provision and not rely on the statutory authorization.

The law also gives what are in effect “safe harbor” guidelines as to the length of time for non-compete provisions applicable to (1) distributors, dealers, franchisees, licensees and similar relationships, which should not exceed three years in duration, and (2) purchasers of businesses, which should not exceed five years in duration.

As you can see, the new law allows employers a greater assurance that a legitimate non-compete will be enforceable, but it imposes many specific requirements, which vary depending on the type of employee covered, and the nature of the employer’s business. A ‘one size fits all” non-compete agreement therefore is not advisable, and an employer should consult with an attorney to draft a contract that is suitable for that employer and is enforceable.

 

Gary Whitaker (6 Posts)


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